Presentation on theme: "Accounting – Revision For Mid Term Exam Dr. Clive Vlieland-Boddy Academic Year 2009-2010."— Presentation transcript:
Accounting – Revision For Mid Term Exam Dr. Clive Vlieland-Boddy Academic Year
IFRS Vs GAAP Started as a EU standard. Now world wide except USA USA will eventually concede and accept. Strength gained after failures of WorldCom and Enron. Makes international comparison simpler. Accounts are founded on the same basis worldwide.
Self Regulatory Vs Statutory Precise rules Vs shared principles A book of rules Vs laid out principles.
Stakeholders Any party interested in the financial statements. Include: – Shareholders – Governments – Public – Employees – Customers – Suppliers – Lenders
Double Entry Bookkeeping
Name of Account DebitCredit
Debits Assets Bank Receipts Expenditures Losses 8
Accounting Concepts Going Concern Matching or Accruals Consistency Prudence
Revision of Understanding Financial Statements Professor Clive Vlieland-Boddy FCA FCCA MBA PhD EU 2009
The Balance Sheet
Assets Have to have a value Either Current or Non Current ( either 12 months. Should be shown at actual cost but can be revalued
Current Assets Short term business assets < 12 months to covert to cash. Examples: Accounts Receivable, Inventories, WIP and Sundry Prepaiments
Inventorie s Marketable Securities Current assets include cash and those assets that are expected to be converted to cash or used up within one year, or an operating cycle, whichever is longer. What are Current Assets? Cash Current Assets include Other Short Term Assets Accounts Receivable Prepaid Expenses
Uncollectible Accounts – Bad Debts If a company makes credit sales to customers, some accounts inevitably will turn out to be uncollectible. PAST DUE L O 5
Examples: Insurance Rent Prepaid Expenses require adjusting entries Assets are decreased Expenses are increased Expenses that have been paid in the current fiscal period but will not be subtracted from revenue until a subsequent fiscal period. Prepaid Expenses and Other Current Assets L 1
Non Current Assets (Fixed Assets) Tangible Intangible Investments
Tangible Assets that can be seen and touched Purchased to enable the business to function Examples: Cars, Vans, Planes, Boats & Plant & Equipment
Intangible Invisible Non Current Assets Examples: Patents, Trade Marks, Know How, Brand Names and Goodwill
Investments Investments in companies for long term benefit. Normally to control supply chain or extend monopoly.
Liabilities Represent a responsibility which will have to be settled. Either Current or Non Current ( either 12 months
Current Liabilities Short term liabilities < 12 months Examples: Accounts Payable, Tax, Dividends Payable & Accrued Expenses
Non Current Liabilities Long term liabilities > 12 months Examples: Loans, Mortgages & Deferred Tax
Shareholders Funds Represents the monies that the owners have invested in the business. Is a liability of the business to those investors. Shares and retained profits
Does it Balance? Assets = Liabilities + Shareholders funds
The Income Statement
Sales ( Revenues )
What represents a sale? We have looked at revenue recognition When is a transaction treated as a sale? Vital we must match income with expenditure. Vital we are consistent.
Cost of Sales
What makes up Cost of Goods Sold? We need to match what has been sold to the real costs of those sales. What has been sold has been consumed. We normally look at: – Opening Inventories – Add Purchases made in the period – Then subtract closing inventories
Specific Identification When a unit is sold, the specific cost of the unit sold is added to cost of goods sold. L O 8
Costs of Goods Sold Oldest Costs Ending Inventory Recent Costs First-In, First-Out (FIFO) L O 8
Recent Costs Ending Inventory Oldest Costs Last-In, First-Out Method (LIFO) L O 8 Costs of Goods Sold Recent Costs
The Impact of Changing Costs In periods of rising costs, LIFO results in lower ending inventory and higher cost of goods sold than FIFO. L O 8
Inventory Accounting System Alternatives Periodic Inventory System Cost of goods sold is determined at the end of the fiscal period. Cost of goods sold is determined each time inventory is sold. Perpetual Inventory System L O 8
Inventory Accounts Retail Firm Merchandise Inventory Finished Goods Inventory Raw Materials Inventory Work in Process Inventory Manufacturin g Firm L O 8 Product available to be sold Used to produce products Partially completed products
Lower of Cost or Net Realisable Value Inventory must be reported at realisable value when it is lower than cost. Can be applied three ways: (1)separately to each individual item. (2)to broad categories of inventory. (3)to the whole inventory. Can be applied three ways: (1)separately to each individual item. (2)to broad categories of inventory. (3)to the whole inventory. Defined as current replacement cost (not sales price). Consistent with the conservatism principle. Defined as current replacement cost (not sales price). Consistent with the conservatism principle.
This gives us the total cost of what has been sold.
Gross Profit or Margin
By subtracting the cost of goods sold from sales we arrive at the gross profit/margin
Trading Statement Sales 160,000 Less Cost of Sales Opening Inventories 21,000 Add Purchases 92,000 Less Closing Inventories -18,000 Cost of goods Sold 90,000 Gross Profit/Margin 80,000
Gross Profit % Sales – Cost of Sales = GP % (Margin) Very important ratio
Overheads, EBIT & Beyond
Overheads Expenses consumed in the period We may need to adjust what is incurred to what is actually consumed!
Overheads Normally grouped under a few principal headings. Examples: Sales and Marketing, General Admin and Depreciation
Incurred Vs Consumed We may well incur expenses but we need to evaluate these. We should only show what has actually been consumed. Example: We may have received invoice for telephone or insurance but for what period do those represent? They can easily be for the previous or next accounting period. We need to adjust these
The Matching Concept
Revenue Vs Capital Expenditure
Capital Expenditure Companies buy items to sell on to customers but might also acquire for its own use. Take a computer retailer. It will buy computers to sell to customers but may also keep some for its own use. Again we return to what has been consumed?
Capital Expenditure Represents a NON CURRENT asset. It is an expense but expected to last more than 12 months. Example: Microsoft develops a new version of windows over 12 months at a cost of $100m. It then expects to sell the new version over the following 2 years generating revenues of $150m per year.
MS Development Expenditure
Balance Sheet End Accounting Period 1 Income Statement Accounting Period 1 Current Assets Non Current Assets Expenditure Incurred on Development $100m Current Liabilities Non Current Liabilities Equity Sales Less Cost of Sales Opening Inventories Add Purchases Less: Closing Inventories Gross Profit Deduct Overheads Expenditure Incurred on Development $100m EBIT
Balance Sheet End Accounting Period 2 Income Statement Accounting Period Current Assets Non Current Assets Expenditure Incurred on Development 100m Less: consumed part (50%) -50m Current Liabilities Non Current Liabilities Equity Sales New Ver 150m Less Cost of Sales Opening Inventories Add Purchases Less: Closing Inventories Gross Profit Deduct Overheads Consumed R & D 50m EBIT
Balance Sheet End Accounting Period 3 Income Statement Accounting Period 3 Current Assets Non Current Assets Expenditure Incurred on Development 100m Less: consumed part (100%) 100m Current Liabilities Non Current Liabilities Equity Sales New Ver 150m Less Cost of Sales Opening Inventories Add Purchases Less: Closing Inventories Gross Profit Deduct Overheads Less Consumed R & D 50m EBIT
What is Actually Consumed
Question? What is left? Consumption means we have eaten it all. What we have not eaten remains and is shown on the Balance Sheet. Example: A company making Orange juice may well purchase many tons of oranges. It will crust these to extract the juice. At the end of an accounting period it way well have sold 1000s of gallons but may also have some still in their warehouse as well as tons of un crushed oranges.
Matching Vs Prudence
Meaningful Results We need to balance the aim of a meaningful result by applying the matching and prudence concepts. Yes be cautious but dont destroy the real picture. And remember … try to be consistent!
Question 1 What is Historic Cost?: a.The current value b.The future value c.The Original Cost d.All of the above Answer: c. It represents the price originally paid.
Question 2 What do you understand by Shareholders Funds: a.Monies invested in the company by the shareholders. b.Accumulated retained profits. c.All of the above Answer: c.
Question 3 What are debtors?: a.Accounts Receivable b.Accounts Payable c.Bad Debts d.All of the above Answer: b. Accounts Receivable
Question 4 What are accounting policies? a.A summary of the ways management have prepared the financial statements. b.Require subjective judgement. c.Should normally follow industry standards d.All of the above Answer: d. All of the above
Question 5 What is capital expenditure: a.Results in a Non Current Asset b.Is expenditure that is expected to last for more than 12 months.. c.All of the above Answer: d. All of the above
Question 6 What is Deferred Tax?: a.Tax that has to be paid to the government within 12 months b.Tax that is never going to be paid c.Tax that will be payable in the future but more than 12 months away. d.Is shown as a Non Current liability. e.C and d are correct Answer: e. It is both delayed by 12 months and therefore shown as a Non Current Liability.
Question 7 What are retained Earnings: a.Profits distributed to shareholders b.Profits not distributed to shareholders c.Belongs to the shareholders d.B and c are correct Answer: d. They represent profits generated by the company and they belong to the owners.
Question 8 What is Gross Profit/Margin: a.EBIT b.Sales Less the cost of sales c.Represents the gross margin made by the company from its day to day trading. d.Is a very useful % to evaluate management control e.Represents the profits made from buying and selling goods. f.B.C D and E Answer: f.
Question 9 What are Ordinary or Common Shares?. a.Represents the owners of the company. b.They rank behind all other investors for payment. c.50 + % controls the company. d.All of the above Answer: d. All of the above
Question 10 What is Net Book Value: a.The value of the Current Assets b.The value of the Non Current Assets c.Represents the original cost less the total depreciation to date d.B and C are correct Answer: d.
Question 11 What is a contingency? a.An event less than 50% likely to happen. b.Has a possible financial outcome c.Should be noted in the financial statements but not included in the accounts. d.All above are correct Answer: d.
Question 12 Do you trust the report of the auditors?: a.May be! b.Possibly! c.Definitely d.What stupid question. Answer: well we all learn…………………
Question 13 What is Treasury Stock?: a.The amount of shares repurchased by the company b.Is shown under shareholders funds c.Represents the total amount actually paid for the shares repurchased. d.All the above are correct. Answer: d.
Question 14 What is an Extraordinary Item. ?: a.An item unlikely to happen again. b.If shown before EBIT would distort the trend data. c.Is shown after EBIT d.All the above are correct. Answer: d.
Question 15 What do you understand by fair value accounting (Mark to Market)?: a.Replaces original historic cost with current value. b.Is permitted by IFRS. c.Was totally misused by Enron d.All the above are correct. Answer: d.